As more and more investors are
nearing retirement, bearish or bullish might matter no more. These investors
are more interested in innovative, well balanced income strategies that try to
not leave them overexposed to market fluctuations or downturns. They want to
find alternative opportunities that provide a certain level of confidence and
help alleviate their fears about outliving their available income.
The traditional solution to the
retirement income dilemma has been to move portfolio assets from equities into
a combination of bonds, annuities and/or dividend paying stocks. Increasingly,
however, many investors question whether traditional strategies will be able to
provide adequate income through their retirement years. At the same time,
however, few of them are willing to expose their portfolios to riskier equity
investments that might provide the returns necessary to satisfy their income
needs.
In recent years, many investors have
turned to ETFs to develop new income producing investment strategies. However,
the number of income producing ETFs is limited and it is too early to determine
how well ETFs correlate with other income alternatives. Also, in light of
current economic events, some investors are wary of making long term
commitments to investments that have not proven their ability to deliver the
anticipated returns.
A Closer Look at Traditional Income
Strategies
Interest rates are at historic lows.
In addition, inflation and taxes can further reduce already negligible income
payments. As a result, government bonds and other "safe" investments
could deliver negative returns, possibly for years to come. Allocating a
percentage of assets to stocks can help hedge against inflation but can wreak
havoc on a portfolio that is taking regular distributions. The chart below
shows the impact of a 30% decline in the value of a portfolio.
Accumulation
Phase Distribution Phase
Portfolio
Decline 30% 30%
Income
Distribution 0% 5%
Return
Needed to Break Even 43% 54%
Given historical market returns, it
could take a considerable amount of time to break even-time that is often not
available. In the scenario above, a portfolio in the distribution phase may be
exhausted in a short time.
Seeking Consistent Income Payments
in Today's Environment
More and more investors are searching
for investment strategies that will simultaneously help them protect their
capital and generate sufficient income throughout their retirement years. In
the process, they are realizing some possible investment realities. For
example:
- Passive investing may not be compatible with today's fast-paced, constantly fluctuating political and economic climate. These volatile times may require a flexible and proactive approach to retirement funds management.
- While diversification is key to capital preservation and income generation, true diversification involves more than changing a portfolio's stock and bond allocation percentages.
- Liquidity is important. Being able to have access to assets in emergencies and passing them on to heirs intact are also important considerations.
- Investment success goes beyond yield. What today's investors need are investment options that combine practical, long term risk management strategies with opportunities for asset growth and enhanced returns.
The reality is that no single approach can move both with and against market currents. The use of investment strategies that utilize a combination of approaches may offer a higher probability of long term investment success. These sophisticated strategies seek to:
- produce a higher return than prevailing interest rates,
- provide the potential for capital appreciation,
- achieve a degree of stability - low volatility,
- preserve capital by managing risk, and
- provide easy access to capital.
While the development, implementation and maintenance of these complex solutions require sophisticated modeling and constant monitoring of market conditions, they may provide an ideal solution for retirement distributions in today's economic times.
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